<PAGE> 1
CONFORMED
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No.1)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From ________ to _______.
Commission file number 0-20981
DOCUMENT SCIENCES CORPORATION
Delaware 33-0485994
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or of organization) Identification No.)
6333 Greenwich Drive, Suite 200
San Diego, CA 92122
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(619) 625-2000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's Common Stock outstanding as of August 6,
1998, was 10,837,796.
<PAGE> 2
DOCUMENT SCIENCES CORPORATION
List of Items Amended
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets-June 30, 1998 and December 31, 1997...................................... 3
Consolidated statements of income-three and six months ended June 30, 1998 and 1997.................. 4
Consolidated statements of cash flows-six months ended June 30, 1998 and 1997........................ 5
Notes to consolidated financial statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7
Signature............................................................................................ 11
</TABLE>
TEXT OF AMENDMENT
EXPLANATORY NOTE:
Each of the above listed Items is hereby amended by deleting the Item in its
entirety and replacing it with the Items attached hereto and filed herewith.
The purpose of this amendment is to amend the Company's 10-Q for the period
ending June 30, 1998 (the "Original Filing") to reflect changes in connection
with a reevaluation of certain customer contracts and the related revenue
recognition in accordance with AICPA Statement of Position on Software Revenue
Recognition 97-2.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (Unaudited)
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,293,279 $ 3,526,301
Short-term investments 16,532,745 18,228,527
Accounts receivable, net 5,887,381 6,468,751
Due from affiliates 1,833,419 851,717
Work in process on development contracts 309,025 288,932
Deferred income taxes 326,500 326,500
Other current assets 1,265,566 279,888
----------- -----------
Total current assets 28,447,915 29,970,616
Property and equipment, net 2,195,401 2,135,930
Goodwill, net 970,049 1,005,111
Computer software costs, net 1,606,308 1,117,319
----------- -----------
Total assets $33,219,673 $34,228,976
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 507,475 $ 673,657
Accrued compensation 854,601 787,511
Other accrued liabilities 322,848 348,559
Deferred revenue 5,605,181 3,812,365
Current income tax payable to affiliate 0 387,443
Current portion of obligations under capital leases 59,598 65,108
----------- -----------
Total current liabilities 7,349,703 6,074,643
Obligations under capital leases 24,558 52,236
Deferred income taxes 411,500 411,500
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized shares - 30,000,000
Issued and outstanding shares - 10,828,671 at June 30,
1998, and 10,803,369 at December 31, 1997 10,829 10,803
Deferred compensation (186,467) (241,469)
Treasury stock (337,486) (240,515)
Unrealized gain on short-term investments 72,515 69,506
Additional paid-in capital 25,404,302 25,398,897
Retained earnings 470,219 2,693,375
----------- -----------
Total stockholders' equity 25,433,912 27,690,597
----------- -----------
Total liabilities and stockholders' equity $33,219,673 $34,228,976
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See notes to consolidated
financial statements.
3
<PAGE> 4
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $ 2,010,616 $ 1,906,301 $ 2,984,378 $ 3,689,380
Annual renewal license and support fees 1,401,472 1,166,979 2,872,541 1,966,920
Services and other 1,453,152 1,609,813 3,134,168 3,008,728
------------ ------------ ------------ ------------
Total revenues 4,865,240 4,683,093 8,991,087 8,665,028
Cost of revenues:
Initial license fees 271,868 242,476 479,606 438,415
Annual renewal license and support fees 209,405 170,886 394,101 281,250
Services and other 989,557 816,940 1,991,783 1,328,203
------------ ------------ ------------ ------------
Total cost of revenues 1,470,830 1,230,302 2,865,490 2,047,868
------------ ------------ ------------ ------------
Gross profit 3,394,410 3,452,791 6,125,597 6,617,160
Operating expenses:
Research and development 1,004,192 801,260 1,929,863 1,493,946
Selling, marketing and customer support 2,944,744 2,145,987 5,379,922 4,184,154
General and administrative 620,861 678,999 2,141,392 1,327,775
------------ ------------ ------------ ------------
Total operating expenses 4,569,797 3,626,246 9,451,177 7,005,875
------------ ------------ ------------ ------------
Loss from operations (1,175,387) (173,455) (3,325,580) (388,715)
Interest income, net 220,475 284,775 467,424 571,651
------------ ------------ ------------ ------------
Income (loss) before income taxes (954,912) 111,320 (2,858,156) 182,936
Benefit of income taxes (200,000) (52,500) (635,000) (78,900)
------------ ------------ ------------ ------------
Net income (loss) $ (754,912) $ 163,820 $ (2,223,156) $ 261,836
============ ============ ============ ============
Net income (loss) per share-basic $ (0.07) $ 0.02 $ (0.21) $ 0.02
============ ============ ============ ============
Weighted average shares used in basic calculation
10,755,727 10,771,458 10,754,784 10,751,425
============ ============ ============ ============
Net income (loss) per share-diluted $ (0.07) $ 0.01 $ (0.21) $ 0.02
============ ============ ============ ============
Weighted average shares used in diluted
calculation 10,755,727 11,057,555 10,754,784 11,054,244
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,223,156) $ 261,836
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 202,526 189,368
Amortization of goodwill 35,062 11,687
Amortization of computer software costs 56,728 48,454
Amortization of deferred compensation 55,002 55,002
Income taxes payable to affiliates (387,443) -0-
Provision for doubtful accounts 213,133 39,292
Changes in operating assets and liabilities:
Accounts receivable (613,465) (822,109)
Work in process on development contracts (20,093) -0-
Other current assets (985,678) (249,926)
Accounts payable (166,182) (51,623)
Other accrued liabilities 41,379 (584,238)
Deferred revenue 1,792,816 (500,661)
------------ ------------
Net cash used in operating activities (1,999,371) (1,602,918)
INVESTING ACTIVITIES
Purchases of short-term investments (net) (10,832,652) -0-
Sales of short-term investments 9,928,434 671,916
Maturities of short-term investments 2,600,000 2,599,431
Purchases of property and equipment, net (261,997) (888,743)
Cash paid for acquired business -0- (507,000)
Unrealized gains on securities 3,009 41,768
Additions to computer software costs (545,717) (210,433)
------------ ------------
Net cash provided by investing activities 891,077 1,706,939
FINANCING ACTIVITIES
Principal payments under capital lease obligations (33,188) (31,102)
Purchase of treasury stock (96,971) -0-
Issuance of common stock 5,431 12,355
------------ ------------
Net cash used in financing activities (124,728) (18,747)
------------ ------------
Increase (decrease) in cash and cash equivalents (1,233,022) 85,274
Cash and cash equivalents at beginning of period 3,526,301 2,465,694
------------ ------------
Cash and cash equivalents at end of period $ 2,293,279 $ 2,550,968
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 6,656 $ 9,960
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
Note A-Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Certain amounts for 1997 have been reclassified to conform
with the 1998 presentation. The information included in this Form 10-Q/A should
be read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis included in the
Company's 1997 Annual Report on Form 10-K. Operating results for the three and
six-month periods ended June 30, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
The Company recognizes revenue in accordance with AICPA Statement of Position
(SOP) 97-2, Software Revenue Recognition. Initial license revenue is recognized
when a contract exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable. The portion of the
initial license revenue which represents the software support for the first year
is deferred and recognized ratably over the contract period. Annual renewal
license and support fees are recognized ratably over the contract period.
Revenues from commissions paid by Xerox in connection with the sale of Xerox
printer products are recognized upon installation of the printer products.
Revenues generated from consulting services are recognized as the related
services are performed. However, when such consulting services are deemed to be
essential to the functionality of the delivered software product, revenue from
the entire arrangement is recognized in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, and
Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type
Contracts.
In October 1998, the Company restated its operating results for the three and
six month periods ended June 30, 1998, to defer to subsequent quarters certain
revenues from contracts totaling $968,000 and $1,424,000 that had been
previously recognized in the three and six month periods ended June 30, 1998,
respectively. This had the effect of increasing net loss by $640,000 and
$968,000 for the three and six month periods ended June 30, 1998, respectively,
and increasing net loss per share (basic and diluted) by $0.06 and $0.09 for the
three and six month periods ended June 30, 1998, respectively.
Note B-Transactions with Affiliates
Document Sciences Corporation (the "Company") has a strategic marketing alliance
with Xerox Corporation (Xerox) under which the parties have agreed to pay each
other fees on referrals that lead to the successful sale or licensing of
products. Included in services and other revenue in the accompanying condensed
consolidated statements of income are commissions earned from Xerox totaling
$70,000 and $234,400 for the three months ended June 30, 1998 and 1997,
respectively, and $154,800 and $413,400 for the six months ended June 30, 1998
and 1997, respectively. Commissions related to referrals from Xerox are included
in selling and marketing expense in the accompanying condensed consolidated
statements of income and totaled $0 and $19,900 for the three months ended June
30, 1998 and 1997, respectively, and $0 and $52,900 for the six months ended
June 30, 1998 and 1997, respectively.
The Company has distribution agreements with certain affiliates which provide
the affiliates with the non-exclusive right to sub-license the Company's
software in Canada, Australia, New Zealand and
6
<PAGE> 7
Brazil. The terms of the distributor agreements provide that the affiliates
receive a discount from the list price of the Company's products licensed,
including maintenance and support. Revenues from the affiliates under these
agreements, net of discounts, were $514,100 and $135,500 for the three months
ended June 30, 1998 and 1997, respectively, and $967,500 and $368,400 for the
six months ended June 30, 1998 and 1997, respectively. Related accounts
receivable are $474,400 and $268,600 from these revenues at June 30, 1998 and
1997, respectively.
The Company has distribution agreements with certain affiliates which provide
such affiliates the non-exclusive right to sub-license the Company's software in
Europe. Revenues under these agreements totaled $631,200 and $494,800 for the
three months ended June 30, 1998 and 1997, respectively, and $1.1 million and
$974,200 for the six months ended June 30, 1998 and 1997, respectively. Related
accounts receivable are $391,800 and $614,900 at June 30, 1998 and 1997,
respectively.
Note C-Net Income Per Share
The Company presents it's earnings per share information in accordance with FAS
No. 128, "Earnings per Share". Statement 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share, which includes the dilutive effects of options, warrants and
convertible securities, is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
The following table reconciles the shares used in computing basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding used in basic earnings per
share calculation 10,755,727 10,771,458 10,754,784 10,751,425
Effect of dilutive stock options -0- 286,097 -0- 302,819
---------- ---------- ---------- ----------
Shares used in diluted earnings per
share 10,755,727 11,057,555 10,754,784 11,054,244
========== ========== ========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain trend analysis and other
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in the
forward-looking statements as a result of various factors, including those set
forth in this discussion under "Factors That May Affect Future Operating
Results" and other risks detailed from time to time in the Company's SEC
reports. In addition, the discussion of the Company's results of operations
should be read in conjunction with the sections entitled "Certain Additional
Business Risks" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
7
<PAGE> 8
RESULTS OF OPERATIONS
The Company develops, markets and supports a family of document automation
software products and services used in high volume electronic publishing
applications. The Company was incorporated in Delaware in October 1991 as a
wholly-owned subsidiary of Xerox Corporation ("Xerox"), and Xerox currently owns
approximately 62% of the Company's outstanding shares of Common Stock.
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statements of income for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial license fees 41% 41% 33% 42%
Annual renewal license and support fees 29 25 32 23
Services and other 30 34 35 35
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
Cost of revenues:
Initial license fees 6% 5% 5% 5%
Annual renewal license and support fees 4 4 5 3
Services and other 20 17 22 15
---- ---- ---- ----
Total cost of revenues 30% 26% 32% 23%
---- ---- ---- ----
Gross profit 70% 74% 68% 76%
Operating expenses:
Research and development 21% 17% 21% 17%
Selling, marketing and customer support 60 46 63 48
General and administrative 13 15 21 16
---- ---- ---- ----
Total operating expenses 94% 78% 105% 81%
---- ---- ---- ----
Loss from operations (24)% (4)% (37)% (5)%
Interest income, net 4 6 5 7
---- ---- ---- ----
Income (loss) before income taxes (20)% 2% (32)% 2%
Benefit of income taxes (4) (1) (7) (1)
---- ---- ---- ----
Net income (loss) (16)% 3% (25)% 3%
==== ==== ==== ====
</TABLE>
REVENUES
Total revenues increased 5.5% to $4.9 million for the three months ended June
30, 1998, from $4.7 million for the three months ended June 30, 1997 and
increased 3.8% to $9.0 million for the six months ended June 30, 1998, from $8.7
million for the six months ended June 30, 1997. This growth was due primarily to
increases in annual renewal and support fees, which are due in part to the
installed customer base acquired from Data Retrieval in May 1997.
Sales Channels. The Company sells its products principally through a direct
sales force domestically, and internationally principally through distributors
and value added resellers ("VARS") and, to a lesser extent, through its direct
sales force. Revenues from export sales and sales through the Company's foreign
subsidiary increased 54.5% to $1.8 million for the three months ended June 30,
1998, from $1.2 million for the three months ended June 30, 1997 and increased
20.7% to $3.1 million for the six months ended June 30, 1998, from $2.5 million
for the six months ended June 30, 1997. This growth was principally due to a
more established and experienced VAR channel in Europe. Revenues from export
sales were 37% and 25% of total revenues for the three months ended June 30,
1998 and 1997, respectively, and 34% and 29% of total revenues for the six
months ended June 30, 1998 and 1997, respectively.
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<PAGE> 9
The Company has entered into distributorship agreements with various Xerox
foreign affiliates to remarket the Company's products internationally. The
Company's revenues from such distributorship agreements related to the
licensing, maintenance and support of the Company's products increased 80.7% to
$1.1 million for the three months ended June 30, 1998, from $630,300 for the
three months ended June 30, 1997 and increased 52.9% to $2.1 million for the six
months ended June 30, 1998, from $1.3 million for the six months ended June 30,
1997. These increases are due principally to substantially increased sales
through Xerox Canada Ltd. and European revenues from Xerox affiliates.
Initial license fees. Initial license fee revenues increased 5.5% to $2.0
million for the three months ended June 30, 1998, from $1.9 million for the
three months ended June 30, 1997 and decreased 19.1% to $3.0 million for the six
months ended June 30, 1998, from $3.7 million for the six months ended June 30,
1997. The increase for the three month period ended June 30, 1998 when compared
to same period in 1997 was due principally to sales to new customers reflecting
in part the expansion of the direct sales force and expansion of the Company's
indirect distribution channel. Initial license fees have declined as a
percentage of total revenue due to increased customer demand for consulting
services and a significant increase in annual renewal license and support fees.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 20.1% to $1.4 million for the three months ended June
30, 1998, from $1.2 million for the three months ended June 30, 1997 and
increased 46.0% to $2.9 million for the six months ended June 30, 1998, from
$2.0 million for the six months ended June 30, 1997. The increase was
principally due to the acquisition of Data Retrieval's installed base of users.
Services and other. Revenues from services and other decreased 9.7% to $1.5
million for the three months ended June 30, 1998, from $1.6 million for the
three months ended June 30, 1997 and increased 4.2% to $3.1 million for the six
months ended June 30, 1998, from $3.0 million for the six months ended June 30,
1997. The increase for the six month period ended June 30, 1998 when compared to
the same period in 1997 was due to consulting services representing a larger
component of new customer orders.
Cost of Revenues
Total cost of revenues increased 19.6% to $1.5 million for the three months
ended June 30, 1998, from $1.2 million for the three months ended June 30, 1997,
and increased 39.9% to $2.9 million for the six months ended June 30, 1998, from
$2.0 million for the six months ended June 30, 1997. The increase in cost of
revenues resulted primarily from increased personnel costs associated with
providing additional professional consulting services to customers.
Operating Expenses
Research and development. The Company capitalized $256,000 and $210,400 of
software costs for the three month periods ended June 30, 1998 and 1997,
respectively, and $545,700 and $210,400 for the six months ended June 30, 1998
and 1997, respectively. The Company did not capitalize any software costs for
the three months ended March 31, 1997. Research and development expenses
increased 25.3% to $1.0 million for the three months ended June 30, 1998, from
$801,300 for the three months ended June 30, 1997 and increased 29.2% to $1.9
million for the six months ended June 30, 1998, from $1.5 million for the six
months ended June 30, 1997. The increase in these expenses resulted principally
from the expansion of the engineering staff and related costs.
Selling, marketing and customer support. Selling, marketing and customer support
expenses increased 37.2% to $2.9 million for the three months ended June 30,
1998, from $2.1 million for the three months ended June 30, 1997 and increased
28.6% to $5.4 million for the six months ended June 30, 1998, from $4.2 million
for the six months ended June 30, 1997. The growth of these expenses was due
principally
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<PAGE> 10
to increased sales, sales support and marketing personnel and related costs and
commissions associated with increased revenues.
General and administrative. General and administrative expenses decreased 8.6%
to $620,900 for the three months ended June 30, 1998, from $679,000 for the
three months ended June 30, 1997 and increased 61.3% to $2.1 million for the six
months ended June 30, 1998, from $1.3 million for the six months ended June 30,
1997. The increase in general and administrative expenses for the six month
period was primarily the result of one-time charges of $459,000 for severance
and recruiting costs taken in the first quarter.
Provision for (benefit of) income taxes. For the six months ended June 30, 1998,
the Company has recognized a tax benefit as a result of the net operating loss
and non-taxable municipal bond interest.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments totaled $18.8
million at June 30, 1998, representing 56.8% of total assets. The Company
intends to continue to invest in short-term, interest-bearing, investment grade
securities.
The Company believes that its existing cash balances and anticipated cash flows
from operations will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
The Company has no significant capital spending or purchase commitments other
than normal purchase commitments and commitments under facilities and capital
leases for the remainder of the year.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's total revenues and operating results have varied, sometimes
substantially, from quarter to quarter and are expected to vary significantly in
the future. The Company's revenues and operating results are difficult to
forecast. Future results will depend upon many factors, including the demand for
the Company's products, the level of product and price competition, the length
of the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the budget
cycles of the Company's customers, the Company's success in expanding its direct
sales force and indirect distribution channels, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of products and services sold, levels of international sales, activities of
and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, the ability of the Company to develop and market new
products and control costs, and general domestic and international economic
conditions. In addition, the Company's sales generally reflect a relatively high
amount of revenues per order, and the loss or delay of individual orders,
therefore, could have a significant impact on revenues and quarterly operating
results of the Company. In addition, a significant amount of the Company's
revenues occur predominantly in the third month of each fiscal quarter and tend
to be concentrated in the latter half of that third month.
Initial license fee revenue is dependent on when orders are received and
shipped. However, because of the Company's sales model, the customer's
implementation schedule and the complexity of the implementation process,
revenue from some software shipments may not be realized in the same quarter as
the shipment occurs. The Company's operating expenses are primarily based on
anticipated revenue levels. Since a high percentage of those expenses are fixed,
a delay in the recognition of revenue from license transactions could cause
significant variations in operating results from quarter to quarter and may
result in losses. To the extent such expenses precede increased revenues, the
Company's operating results would be materially adversely affected.
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<PAGE> 11
Marketing alliances with Xerox have contributed a substantial portion of the
Company's income from operations and net income for certain prior operating
periods, have had a high degree of inconsistency from quarter to quarter and are
difficult to estimate. Failure to continue to receive such commissions would
have a material adverse effect on the Company's business, operating results and
financial condition. Although neither Xerox nor its affiliated entities has
expressed to the Company any intention to terminate their respective agreements
with the Company, these agreements generally may be terminated on no more than
90 days notice. Accordingly, there can be no assurance that Xerox or its
affiliates will continue these relationships or, if they do, that they will be
on terms favorable to the Company. Furthermore, there can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and Xerox and its
affiliates. Though the Company intends to continue its existing relationships
with Xerox, the Company's strategy is to lessen its dependence on Xerox.
However, there can be no assurance that the Company will be able to do so and,
because of the Company's current level of dependence on Xerox, there can be no
assurance that the Company's transition to a more independent company will not
maintain these relationships, particularly with Xerox and its affiliates, or to
establish new relationships in the future, could have a material adverse effect
on the Company's business, operating results and financial condition.
Due to the foregoing factors, revenues and operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
The Company is continuing to assess the potential impact of Year 2000 software
and operational compliance issues on its business and the related expenses of
remedying such impact. The Company is utilizing internal resources to identify,
modify or reprogram, and perform extensive testing on its systems, in connection
with the Year 2000 issue. The Company expects to have all necessary changes
implemented by 2000. The cost of the Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Document Sciences Corporation
(Registrant)
Date: October 26, 1998 /s/ John H. Wilson
- ----------------------- --------------------------------------------
John H. Wilson
Interim Chief Financial Officer
(Duly Authorized and Principal
Financial Officer)
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,293,279
<SECURITIES> 16,532,745
<RECEIVABLES> 8,152,211
<ALLOWANCES> 431,411
<INVENTORY> 0
<CURRENT-ASSETS> 28,447,915
<PP&E> 3,492,147
<DEPRECIATION> 1,296,746
<TOTAL-ASSETS> 33,219,673
<CURRENT-LIABILITIES> 7,349,703
<BONDS> 0
0
0
<COMMON> 10,829
<OTHER-SE> 25,423,083
<TOTAL-LIABILITY-AND-EQUITY> 33,219,673
<SALES> 5,856,919
<TOTAL-REVENUES> 8,991,087
<CGS> 873,707
<TOTAL-COSTS> 2,865,490
<OTHER-EXPENSES> 9,451,177
<LOSS-PROVISION> 212,964
<INTEREST-EXPENSE> 6,656
<INCOME-PRETAX> (2,858,156)
<INCOME-TAX> (635,000)
<INCOME-CONTINUING> (2,223,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,223,156)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
